Unilateral alteration of public issue terms by issuer discharges underwriting liability under the Indian Contract Act.

Tommorrowland Ltd. launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by 267 underwriters

The issue was initially oversubscribed and closed on February 18, 1995

due to anomalies in the offer price, SEBI directed the company on March 6, 1995, to provide investors an option to withdraw their applications

Following massive withdrawals, subscription fell below the mandatory 90% threshold

Tommorrowland issued devolvement notices to underwriters, who refused to pay.

After a long delay, the Delhi High Court appointed an Arbitrator in 2007, who passed awards in 2012 holding underwriters liable for damages at Rs. 80 per FCD plus 18% interest

On petitions under Sections 14 and 17 of the Arbitration Act, 1940, the Single Judge upheld liability but reduced damages to Rs. 20 per FCD and slashed interest rates

Both the issuer and underwriters appealed

The court primarily applied Section 39 of the Arbitration Act, 1940, which specifies appealable orders, including those refusing to set aside an award

Section 28 of the 1940 Act was applied regarding the Court's power to grant post-facto extensions of time for making an award

the Court applied the law of guarantee under Chapter VIII of the Indian Contract Act, 1872 (*IC Act*).

It relied on Section 126 (defining surety/guarantee), Section 128 (co-extensive liability), and Section 133, which mandates the discharge of a surety when a variance is made in the terms of the contract between the principal debtor and creditor without the surety’s consent

The Court followed the principle from *State of Maharashtra v. Dr. M.N. Kaul* that a guarantor cannot be made liable beyond the strict letter of its engagement

The Court first dismissed the maintainability objections, holding that an order refusing to set aside an award is squarely appealable under Section 39(1)(vi)

It also upheld the post-facto extension of time for the award under Section 28, given the complexity of 260+ claims

On the merits, the Court found that the Arbitrator and Single Judge failed to apply Chapter VIII of the IC Act

An underwriting agreement is essentially a contract of guarantee where the underwriter is the "surety," the issuer is the "creditor," and the public is the "principal debtor"

The Court reasoned that once the public issue was successfully subscribed and closed on Feb 18, 1995, the contingency (under-subscription) ceased to exist

Tommorrowland’s unilateral decision (pursuant to SEBI directions) to permit withdrawals without the underwriters' consent constituted a "material variance" under Section 133 of the IC Act

This act retrospectively altered the risk profile, thereby automatically and irrevocably discharging the underwriters from any further liability

It held that the underwriters stood statutorily discharged from all obligations by the operation of Section 133 of the IC Act the moment the contract terms were varied without their consent

The Court set aside the Impugned Judgments and the Arbitral Awards insofar as they fastened liability on the underwriters

Consequently, Tomorrowland's claims for higher damages and interest were rendered infructuous

No order as to costs was made